UPDATE ON ASCEND COMMUNICATIONS
07:14am EDT 11-Aug-97 Hambrecht & Quist (Joe Noel, (415) 439-3609) ASND CSCC NN
**** Hambrecht & Quist **** Hambrecht & Quist **** Hambrecht & Quist ****
Company: Ascend Communications, Inc.
Price: 49.75
Recommendation: BUY
Notes: a, f
Analyst: Joe Noel
Phone: (415) 439-3609
Associate Analyst: Reggie King, (415) 439-3419
Firm: Hambrecht & Quist
Department: Technology
Industry: Communications
Date: 8/11/97
ESTIMATES Q1 Q2 Q3 Q4 FY
'97 EPS 0.31A 0.31A 0.36E 0.40E 1.40E
'97 REVENUES 292.7A 311.7A 336.6E 373.7E 1314.7E
'98 EPS 0.43E 0.45E 0.49E 0.52E 1.90E
'98 REVENUES 395.0E 431.0E 446.7E 489.5E 1782.0E
REVENUE ESTIMATES IN MILLIONS
52 WEEK PRICE RANGE: 36.00 - 80.00 ** CURRENT BOOK VALUE: 3.31/SH
REVENUE(F1996): 890.3 MIL ** P/E FY97: FY98: 35X; 26X
CASH PER SHARE: 3.00/SH ** SHARES OUTSTANDING: 188.4 MIL./
F97 Y/Y EPS GROWTH: 40.4% ** '97 PRICE TO SALES: 7.13X
MARKET CAP: 9.372 BIL. **
UPDATE ON ASCEND COMMUNICATIONS
* Over the past few days we have had several conversations with both senior
management and middle management at Ascend.
* It appears there is strong European demand developing for Ascend's products.
However, we believe that Ascend is somewhat concerned about the timing of this
demand.
* We have recently talked to UUNET and this account seems to be very secure for
Ascend.
* We certainly believe that Ascend remains at least a market performer over the
next few months and most likely a market outperformer.
UPDATE ON ASCEND COMMUNICATIONS
Over the past few days we have had several conversations with both senior
management and middle management at Ascend. Below is a summary of our findings
and our current opinion of this stock:
THE SEPTEMBER QUARTER
Estimates appear to be supportable. We are currently looking for $0.36 EPS on
revenues of $336.6 million. We however, do not believe there is much upside
available.
EUROPEAN SALES
It appears there is strong European demand developing for Ascend's products.
However, we believe that Ascend is somewhat concerned about the timing of this
demand. We believe there is a very strong possibility that the expected
acceleration in European demand will not happen until the December quarter.
JAPANESE SALES
All indications are that Japan will be strong in the September quarter - not
only for Ascend's core products, but also for Cascade's frame relay and ATM
products. We have found it surprising how Internet access services in Japan are
dominated by the larger players versus the U.S. model that is much more
fragmented. We believe this plays into Ascend hands due to the access densities
of their products versus the competition.
UUNET ACCOUNT
We have recently talked to UUNET and this account seems to be very secure for
Ascend. We believe that the access side of the business will remain firmly in
Ascend's hands. We also see additional opportunities for Ascend's GRF product
at this account. Although not confirmed independently, ASND's management claims
to now be operating the GRF at this account at OC-3 speeds (155 Mbps) and will
be moving to OC-12 speeds over the next few months. We expect ASND to give
Cisco a strong run for their money in competing for the UUNET backbone transit
business.
CISCO AND 3COM (US ROBOTICS) DISCOUNTING
The level of 3Com's aggressiveness in the market concerns us. Additionally,
Cisco is also being very aggressive. We expect both of these players to
continue pressure in this area and we expect that Ascend will have to remain
diligent. Fortunately, in our opinion, Cisco still has an inferior product and
while parts of the market will buy on price alone, we believe that the price
differential is not great enough to cause any major shift.
FRAME RELAY AND ATM SALES (CASCADE SALES)
It appears that sales of the frame relay and ATM products are strong. We
believe this is attributable to both increased sales to existing U.S.-based
customers and to the development of new international accounts mainly among
ASND's existing customer base. While it is too early to determine the extent of
the strengthening by the "Cascade" sales, we believe that the end result will be
a positive surprise to investors. We believe this is a significant positive for
Ascend.
ASCEND AND CASCADE INTEGRATION
One of the big concerns relative to the merger of Ascend and Cascade was the
impact on operations due to the merger of operations, sales and marketing.
While many parallels were drawn to the relatively strenuous merger between West
coast-based Synoptics and East coast-based Wellfleet, we do not believe similar
issues are arising at Ascend. Our conversations with mid-level personnel
indicate that the integration is going rather smoothly. The marketing groups of
both organizations seem to be working well together and while it appears there
have been some of the expected minor conflicts among the sale forces, it appears
the integration is nearly complete and is a success. This degree of success
does not surprise us. While we certainly agree that Ascend's management team
deserves most of the credit for the smooth integration, we also believe that
Cascade's small sales force compared with the high customer concentration also
assisted in making this integration inherently easier than mergers of other less
similar organizations.
THE BOTTOM LINE
OUR OPINION OF THIS STOCK
Over the past month, we have been conservative in recommending shares of Ascend
to our clients. We are concerned with the timing of both European sales and the
aggressive pricing by 3Com and Cisco. However this is only our short term
trading call. In the longer run - let's say past the middle of the December
quarter, we are much more positive. It appears that the larger access providers
are still desiring higher density products and we believe that Ascend has some
strong advantages over the competition. Additionally, we are excited about the
trend in Cascade's business. One of the main complaints against Cascade has
always been that the company did not develop an effective international sales
channel. We believe that this issue is virtually resolved. Additionally, we
maintain our position that the frame relay market will remain healthy and that
the WAN market is the only viable one for ATM. Certainly, Newbridge's recently
announced quarterly results (20% and 40% sequential growth rates for frame and
ATM equipment, respectively) yield evidence of this market's continued strength.
We believe there are currently some strong positives relative to the Ascend
story, but nevertheless, there are also some nagging issues that have yet to be
addressed to our satisfaction. However, we do not believe that the issues
relative to Ascend are substantially different than those that face most of the
other companies within this sector. We certainly believe that Ascend remains at
least a market performer over the next few months and most likely a market
outperformer. We are therefore maintaining our BUY recommendation of this
stock.
The information contained herein is based on sources believed reliable but is
neither all-inclusive nor guaranteed by our firm. Opinions reflect our judgment
at this time and are subject to change. In the course of our regular business,
we may be long or short in the securities mentioned and may make purchases
and/or sales of them from time to time in the open market or otherwise. these
reports often contain only partial information in very brief, often outline
form; their purpose is to provide rapid information and preliminary evaluations
of such events or situations, which may very rapidly be changed as a result of
subsequent additional information and analysis. Please contact your account
executive or the analyst for additional detail.
Note Legend:
(a) Hambrecht & Quist LLC maintains a market in these stocks.
(b) Hambrecht & Quist LLC has been an underwriting manager, or co-manager, or
has privately placed securities of these companies within the last three years.
(c) Hambrecht & Quist LLC has an investment position in these companies.
(d) A Hambrecht & Quist LLC employee is a director of these firms.
(e) The analysts covering these stocks have investment positions.
(f) Options are available on these issues.
(g) Entities associated with Hambrecht & Quist LLC have an aggregate beneficial
ownership of more than 5% of the outstanding equity securities of these
companies.
(h) Hambrecht & Quist LLC acts as a financial advisor to this company.
(r) Restricted. No recommendation at this time. May, but does not necessarily,
designate a company in registration.
First Call Corporation - all rights reserved. 617/345-2500
END OF NOTE
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Copyright (c) 1997 First Call Research Notes
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